On Jan. 5, 2023, the Federal Trade Commission issued a Notice of Proposed Rulemaking essentially banning non-compete clauses and categorizing them as unfair methods of competition. Such clauses serve to protect a business's trade secrets, confidential information and customer relationships, which makes the adoption of such a rule concerning for employers. The comment period for this proposed rule has now been extended to April 19, so businesses still have time to voice their concerns directly to the FTC. This article summarizes some of the ways that the proposed rule, if enacted, could affect businesses.

Ability to contract and negotiate

The proposed rule would take away the ability of employees and employers to bargain for restrictive covenants. Currently, only California, North Dakota, Oklahoma and Washington, DC, ban such agreements, although nine other states prohibit them for individuals who do not meet a certain wage threshold. Both employers and employees currently benefit from such bargaining, as employers are able to insulate themselves from the actions of former employees for whom they have, in turn, provided consideration in the form of continued employment, access to confidential and proprietary information, goodwill and specialized training. The proposed rule would strip away this right from both sides.

Under the current language of the proposed rule, the ban on non-compete agreements applies retroactively, meaning that employers will have to discard prior agreements and provide individualized notice to current, as well as former, employees that the agreement is no longer valid. Employers will then have to navigate how to account for the consideration previously provided or promised.